Dollar falls on optimism over Greece, ECB

Euro still destined to fall to $1.24, analysts say

By

DeborahLevine

SarahTurner

NEW YORK (MarketWatch) — The euro rose 1% against the U.S. dollar on Thursday as reports showed more of Greece’s creditors will participate in a bond-swap deal, easing worries that a disorderly default may occur.

The euro extended gains as European Central Bank President Mario Draghi pointed to progress in the euro zone’s economy and financial markets, relieving some worries that the region’s sovereign-debt crisis may spread further.

Greece debt deal hits crucial stage

Greece will announce Friday how many private bondholders have signed up for its high-stakes debt-swap deal. (Photo: Reuters.)

The ICE dollar index
DXY, -0.30%
which measures the dollar against a basket of six currencies, fell to 79.090, from 79.692 in late trading on Wednesday.

The euro
EURUSD, +0.0000%
climbed to $1.3286 from $1.3154 late the previous day. It touched $1.3133 intraday.

The shared currency
USDJPY, +0.00%
jumped against the Japanese yen to buy ¥108.40, from ¥106.80.

Analysts still expect the euro to lose ground, both for technical and positions reasons and because the fundamental outlook for the euro zone is much worse than in the U.S.

In that vein, traders are watching for Friday’s nonfarm payrolls report for February, which is expected to show the U.S. economy continued to add jobs at a good pace. Read about U.S. jobs data.

The euro could fall toward $1.2621, according to MacNeil Curry, chief rates and currencies technical strategist at Bank of America Merrill Lynch. That will be confirmed if the shared currency can’t break above $1.3367, he said.

Longer term, the euro could end the second quarter around $1.31, according to RBC Capital Markets. That’s actually an improvement from a prior forecast for it to fall to $1.29 in that time frame. Still, by the end of this year the euro is likely to decline to $1.27, and further to $1.24 by the end of 2013, according to strategists at the firm.

During his monthly news conference, Draghi also said the ECB’s long-term refinancing operations have been an “unquestionable success” in terms of reducing the risk of a credit crunch. He also emphasized a sense of unity between members of the European Union and a shared goal of price stability.

“His dismissal of any internal squabbles with Bundesbank and his somewhat upbeat outlook for growth” were positive for the euro, said Andrew Busch, global currency and public policy strategist at BMO Capital Markets.

His remarks came as the ECB kept its benchmark rate steady, as had been widely expected it would. The fact that Draghi said the ECB didn’t discuss lowering interest rates or considering another liquidity operation lent support for the euro, said Kathy Lien, director of currency research at GFT. See story on ECB.

As for Greece’s debt swap, investors grew more sanguine following reports that more than 75% of private creditors have agreed to participate in the deal, a significant element of the latest international bailout of Greece.

Greece’s private bondholders have until 10 p.m. Athens time, or 3 p.m. Eastern, on Thursday to tender into the offer. Greece’s debt management agency said it would detail results on Friday morning. Read story on Greek debt swap.

It’s still unclear whether participation will be north of the 90% level that many economists expect will be necessary to convince the government not to push for the triggering of collective-action clauses that would force all private bondholders to participate in the swap.

The uncertainty surrounding whether CDS will be paid out “could still come as a small negative for risk appetite and the euro,” said Valentin Marinov, a currency strategist at Citi. “The initial negative response will be mainly driven by concerns about more defaults by insolvent sovereigns elsewhere in the euro zone periphery.”

Beyond the initial market volatility, “a credit event in Greece could be actually positive for the euro zone debt markets as it could restore investor confidence in the CDS insurance,” he wrote in a report.

Also Thursday, the Bank of England left its lending rate at a record low and made no changes to its quantitative-easing program.

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